Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether a post-graduate fellow who is a Chinese national qualifies for an exemption from tax under Article 19 of the Canada-China tax treaty.
Position: Maybe, if the taxpayer was resident in China for purposes of the Convention either immediately before entering Canada or while staying in Canada.
Reasons: Application of Article 19 of the Convention and review of status as employee or student.
CANADA CUSTOMS AGENCE DU REVENU
AGENCY DU CANADA
MEMORANDUM NOTE DE SERVICE
DATE November 12, 2004
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TO FROM
À Ms. Margaret Dobbie DE Eliza Erskine
Non-Filer Program International Section I
Compliance Division 952-1361
International Tax Services Office
2204 Walkley Rd.
Ottawa, ON K1A 1A8
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FILE
DOSSIER 2004-007608
SUBJECT:
OBJET: Article 19 of the Canada-China Income Tax Convention (the "Convention")
We are writing in reply to your memorandum to us of May 10, 2004, regarding the above-noted subject matter. We understand that you have been asked to determine whether the taxpayer is exempt from tax on his income for the taxation years in question on the basis of Article 19 of the Convention.
Facts
? The taxpayer is a Chinese national. It is not clear whether the taxpayer was a resident of China for purposes of the Convention immediately prior to arriving in Canada.
? The taxpayer came to Canada take up a XXXXXXXXXX-year appointment (which could be extended to XXXXXXXXXX years), as a XXXXXXXXXX. According to the documents provided, the taxpayer occupied his position from XXXXXXXXXX until approximately XXXXXXXXXX (there is no document establishing his date of departure).
? The taxpayer's Employment Authorization from Citizenship and Immigration Canada (CIC) had to be renewed on a yearly basis. The taxpayer was categorized by CIC as a "XXXXXXXXXX". One of the documents provided, a letter to the CRA from the Director, states that the taxpayer's CIC designation is commonly given to post-graduate students and does not necessarily provide an accurate description of the student's actual occupation in Canada.
? According to the letter referred to immediately above, the taxpayer was invited to take up the fellowship in order to further his studies in his field of research. The stipend he received under the terms of the fellowship was provided "to assist him while he continues his advanced training here in Canada". The taxpayer's original letter of offer from the Director, dated XXXXXXXXXX, states: "This stipend is for study and research and is considered a continuation of your postgraduate education".
? The taxpayer states that his sole function for the years XXXXXXXXXX was advanced study and research. This is implicitly confirmed in the Director's letter to the CRA.
We are unable to provide you with a final answer in this case, for the reasons discussed below, however, we hope that the following comments will be of assistance to you. There are four requirements that must be met in order for a taxpayer to benefit from the exemption in Article 19 of the Convention:
(1) The taxpayer must be a student, apprentice or business trainee.
(2) The taxpayer must either be, or have been immediately before visiting Canada, a resident of China.
(3) The taxpayer must be present in Canada solely for the purpose of his education or training (this means physically present in Canada).
(4) The income for which the exemption is claimed must be received by the taxpayer for the purpose of his maintenance, education or training.
Based on the facts and documents provided, it is our view that the taxpayer in this case likely satisfies conditions (1), (3) and (4) above.
Article 19 of the Convention uses the terms "apprentice" and "business trainee" together with the term "student", which suggests that the Article may reasonably be applied to a postdoctoral fellow. Moreover, the CRA views a postdoctoral fellow as a "student" for domestic tax purposes in appropriate circumstances. It is a question of fact whether a postdoctoral fellow is a "student, apprentice or business trainee" and whether a particular payment is for the purpose of his maintenance, education or training for purposes of Article 19 of the Convention. Although the taxpayer in the present case included his stipend on his Canadian tax return as "employment income", and paid CPP and EI premiums, we do not view this as determinative in the context of applying Article 19 of the Convention.
You did not provide the final contract between the taxpayer and the university for our review, therefore it is not clear whether the stipend would be considered employment income or a fellowship (see IT-75R3 for the definition of "fellowship"), for Canadian tax purposes. If you determine, based on all the facts, that the taxpayer's stipend was a fellowship and not employment income for Canadian tax purposes, then conditions (1), (3) and (4) above will generally be met, assuming that the taxpayer was not in Canada for a reason other than to take up the fellowship.
The following facts, if present, would suggest that the stipend was employment income for Canadian tax purposes:
? The stipend is given for a specific numbers of hours a week, with the possibility of extra pay for overtime.
? The amount of the stipend is similar to an amount that would be paid to a professional in the relevant field of expertise for services rendered rather than an amount intended to assist toward the maintenance of an individual while obtaining expertise in the field.
? There is a benefits package that is the same as or similar to the benefits package received by term employees.
? The amount of vacation time is fixed by contract, especially where it depends on time worked.
? The university considers its contract with the individual to be a contract of employment and the research fellow acknowledges this relationship and is aware that CPP and EI will be deducted accordingly.
Where a stipend would be considered employment income for Canadian tax purposes, it is less clear whether conditions (1), (3) and (4) above will be met. That being said, an employee could still be a "student, apprentice or business trainee", for purposes of Article 19 of the Convention, whose salary was intended to do little more than maintain him while he was in Canada. In the present case, based on the facts available to us, the stipend was a fixed amount ($XXXXXXXXXX). The documents we have available to us all comment that the stipend is intended for maintenance and study only, which is borne out by the amount of the stipend given the relatively high cost of living in XXXXXXXXXX. With respect to condition (3) above, we have no information that suggests that the taxpayer was in Canada for anything other than furthering his education and training in a particular field of study. If you find evidence that the taxpayer had another purpose in coming to Canada, condition (3) will not be met.
With respect to condition (2), we were unable to determine whether or not the taxpayer was a resident of China either immediately before arriving in Canada or while he was living in Canada, based on the information available to us. We note that the copies of written correspondence included with this file indicate that the taxpayer was living in the United States both before he arrived in Canada and after he left Canada. It is a question of fact and Chinese law whether the taxpayer was resident in China for purposes of the Convention immediately prior to arriving in Canada or while he was living in Canada. The documents you sent us provided no information with respect to the taxpayer's ties to China (other than the fact that he was a national of China during the time in question) or his residence status for tax purposes there.
The taxpayer was probably a factual resident of Canada for tax purposes while he was living here. In the unlikely event that he was not, he would have been a deemed resident of Canada under paragraph 250(1)(a) of the Income Tax Act (the "183 day rule"), in each of the relevant years. We refer you to Interpretation Bulletin IT-221R3, Determination of an Individual's Residence Status ("IT-221R3"), for more details on determining the taxpayer's residence status for purposes of the of the Income Tax Act.
The taxpayer may have been a resident of both Canada and China while he was living in Canada. If this was the case, you will have to refer to the residence "tie-breaker rules" found in Article 4 of the Convention. These rules are also discussed in IT-221R3. If the taxpayer is determined to be a resident of China for purposes of the Convention during the years in question, then subsection 250(5) of the Income Tax Act will deem him to have been a non-resident of Canada throughout that period.
In conclusion, if you determine that the taxpayer was a resident of China for purposes of the Convention either immediately before arriving in Canada or during his stay in Canada, then, subject to all of the facts being as represented in the documents provided to us, it is our view that Article 19 of the Convention probably applies to the taxpayer's stipend as a postdoctoral fellow during the relevant years.
We trust that our comments will be helpful to you. If you have any questions concerning the issues discussed in this memorandum, please contact the author at the number indicated above.
Yours truly,
Ted Cook
A/Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
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